What is a lock-up period: meaning and impact on company shares

What is a lock-up period: its meaning and impact on a company's shares.

A lock-up is a period during which a company's major shareholders are prohibited from selling their shares after an initial public offering (IPO) or going public. This mechanism is often used to protect the stock price and stabilize the company after an IPO in order to avoid sharp market fluctuations and speculation. In this article, we will look at how a lock-up works, who benefits from it, and what consequences it may have for investors and companies.
Main goals of a lock-up period
A lock-up helps stabilize the market by limiting the sale of shares immediately after going public. The main goals of a lock-up are:

Protecting the stock price: If major shareholders immediately sell their shares, this can dramatically reduce the stock price, which is unfavorable for the company and investors.
Investor confidence: A lock-up period shows that the company's management is confident in its long-term success because it holds on to its shares.
Reduced Volatility: Lock-ups reduce the risk of sharp price movements in stocks, creating a more stable trading environment.
How a Lock-up Period Works
A lock-up typically lasts between 90 and 180 days, depending on the agreement and market conditions. During this period, founders, management, and large shareholders are not allowed to sell shares on the open market. After the lock-up period expires, shares become available for sale, which sometimes leads to an increase in supply and a decrease in price.

Who benefits from a lock-up?
For companies: It helps protect the share price and build investor confidence.
For small investors: A lock-up protects small shareholders from a sharp drop in share price associated with mass selling.
Supports the company's image: When founders and management hold on to their shares, it strengthens the company's image as a reliable issuer.

Risks and possible consequences

After the end of the lock-up period, shares may become cheaper, as large shareholders get the opportunity to sell their stakes. This can create pressure on the market, and the share price may fall.

Risks for investors:

Share price decline: After the end of the lock-up, a wave of sales is possible, leading to a fall in the share price.

High volatility: Sharp fluctuations can create an unstable situation on the market.

Risks for companies:

Image risks: Massive sale of shares after the lock-up may look like a decrease in confidence in the company.

Loss of support from investors: A sharp price decline can scare off long-term investors.

Examples of the use of the lock-up period in the Russian IPO market

In the Russian market, lock-up is also an important tool for IPOs of large companies, supporting the share price and stabilizing the market in the first months after entering the stock exchange. Here are some well-known examples:

1. Sovcomflot (2020)

In October 2020, Russia's largest shipping company Sovcomflot held an IPO on the Moscow Exchange. As part of this placement, a 90-day lock-up period was established for the company's main shareholders and top management. This restriction helped stabilize stock prices in the first months after the IPO.

2. Ozon (2020)

In December 2020, Russian online retailer Ozon successfully entered the NASDAQ stock exchange. A 180-day lock-up period was established for the company's shareholders and employees. This made it possible to avoid massive sales of shares and maintain their value in the first six months after the placement.

3. Fix Price (2021)

In March 2021, the chain of fixed-price stores Fix Price held an IPO on the London Stock Exchange. As part of this placement, a 180-day lock-up period was established for the company's main shareholders and management. This restriction ensured stability of share prices in the first months after entering the stock exchange.

Lock-up is an important element of the IPO structure, which helps stabilize shares and maintain investor confidence. It is important for small investors to understand what may happen after the end of the lock-up period and how this may affect the share price.

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